The FTSE 100’s recent fall could prove to be a buying opportunity for long-term investors. The index has always recovered from its various crises and bear markets to post new highs. This can sometimes take time, of course. But long-term investors can benefit from buying a diverse range of shares while they are cheap.
Indeed, through buying companies with sound finances and strong market positions while they trade on low valuations, you could capitalise on the FTSE 100’s recent crash. Over the long run, you could generate high returns which improve your financial prospects.
Sound finances
What is the most important consideration to make when buying shares at the present time? I think it is whether the business in question will survive the upcoming economic challenges. In the UK, and in many countries, restrictions on people’s movement are in place. This will cause challenging trading conditions for a wide range of businesses. And it could mean that their sales are significantly lower than they otherwise would be.
As such, it is logical to focus your capital on companies which have modest debt levels and strong free cash flow. Moreover, making sure they can afford their debt interest payments with severely reduced sales could be a sound move. And with many companies having banking covenants in place, ensuring they have sufficient headroom to comply with their covenants could be a good idea. It may mean they have a higher chance of overcoming short-term challenges to capitalise on the prospective recovery in the coming years.
Strong market positions
Companies with strong market positions could benefit from the current crisis. For example, they may be able to expand their market share due to present challenges affecting their peers to a greater extent.
Therefore, investors may wish to focus on companies which have wide economic moats. This could mean they have strong brand loyalty, lower costs than their rivals, or a unique product, for example. They may be better able to not only survive an economic slowdown, but to recover from it once restrictions on people’s movement are lifted.
Low valuations
The FTSE 100’s recent fall means that most stocks are now trading at significantly lower price levels than they were just a few months ago. However, as always, some stocks appear to offer better value for money than their peers.
This may not necessarily mean that they have the lowest valuations. Rather, it could be that their valuations are more attractive than their peers based on the quality of their business models. In other words, the cheapest stocks may not necessarily be the most attractive when their outlooks are taken into account.
Through buying good quality businesses while they trade on attractive valuations, you could generate high returns in the long run. The FTSE 100 may not recover quickly, but its track record shows that a bull market is likely to be ahead over the coming years.
